While anxiety mounts over a possible recession, the newly-minted head of the Federal Reserve Bank of Boston told New England business leaders Monday that she thinks a "soft-ish landing" for the economy is a realistic possibility, though getting inflation under control will cause pain for some Americans as unemployment rises.
Dr. Susan Collins, making her first public speech as president and CEO of the Boston Fed, told the Greater Boston Chamber of Commerce that "it's quite likely" that the persistently high inflation that has been crushing families and workers in Massachusetts and across the country for the better part of a year "is near peaking and perhaps may have peaked already." But the central bank has little power over factors on the supply side of the equation that are fueling that inflation.
The Fed can't alleviate pandemic-related bottlenecks in global supply chains, can't predict how the ongoing war in Ukraine will further impact energy prices, and can't influence labor force pressure points like an aging population and decreased immigration, she said. But Collins said that she still think that "the goal of a more modest slowdown, while challenging, is achievable."
One of the main actions the Fed can take is to raise interest rates as a way to cool off the demand side of the puzzle, as it did last week when it raised its policy interest rate by 3/4 percentage point and signaled that "ongoing increases will be appropriate." And while the Fed works towards its goal of 2 percent inflation (the Consumer Price Index rose 8.3 percent in August), Collins said she thinks that a significant downturn can be avoided, though it will "require slower employment growth and a somewhat higher unemployment rate."
"There are reasons to be somewhat more optimistic about the ability to achieve the necessary slowing of demand without leading to a significant downturn this time around. Household and business balance sheets are considerably stronger than in previous tightening cycles, reducing the risk of a significant retrenchment in spending and investment as interest rates rise," she said Monday morning. "Labor market conditions also differ from past cycles. Firms seem to have too few workers, not an excess, suggesting that this time a slowdown in activity may have a smaller impact on employment."
Collins' remarks Monday morning echoed those from Fed Chair Jerome Powell, who last week said that the Fed has "both the tools we need and the resolve it will take to restore price stability," even if that means that some people lose their jobs.
"Higher interest rates, slower growth, and a softening labor market are all painful for the public that we serve. But they're not as painful as failing to restore price stability and then having to come back and do it, down the road again and doing it at a time when actually now people have really come to expect high inflation," Powell said last Wednesday. "If the concept of high inflation becomes entrenched in people's economic thinking about their decisions, then sort of getting back to price stability, the cost of getting back to price stability just rises and so we want to avoid that. We want to act aggressively now and get this job done and keep at it until it's done."
Forecasts that the Fed released last week show that the central bank expects the national unemployment rate to rise from 3.7 percent currently to median of 4.4 percent next year.
Massachusetts' senior senator, U.S. Sen. Elizabeth Warren, has long been weary of Powell and his track record as a Wall Street regulator (last year she said Powell was "a dangerous man to head up the Fed."), and his comments last week did not sit well with her.
"I've been warning that Chair Powell's Fed would throw millions of Americans out of work — and I fear he's already on the path to doing so," Warren tweeted last week. On Sunday, she added, "Fed Chair Powell seems determined to push the economy over a cliff — even after he admitted rate hikes won't lower key prices. Destroying jobs and crushing wages of millions of workers is reckless and dangerous. Recession is not the solution to inflation."
During a question-and-answer session with Greater Boston Chamber CEO Jim Rooney during Monday's event, Collins pointed out another consequence of the Fed's monetary policy, one that has particular significance for Massachusetts.
"An unfortunate temporary dimension of raising interest rates is it can slow down some of housing construction," she said, adding that she has "certainly heard quite a bit about" about the shortage of housing in the Greater Boston region.
The Business View
Retailers Association of Massachusetts President Jon Hurst took in Collins' speech Monday and said afterwards that he doesn't envy the job the Fed is facing and appreciated that Collins noted that supply chain headaches have eased a bit in recent months.
"A year ago, it was five times the cost and months and months before they got the goods. They're getting the goods much faster now. Costs are still up there, but they're coming down," Hurst said.
He added of monetary policymakers at the Fed, "I just hope that they keep reminding themselves that the consumer is 70 percent of the economy. And what the consumer does, particularly in the fourth quarter, is going to have a dramatic impact on how we go forward. And I hope they also recognize the challenge of small businesses, because the small businesses need one of two things: they need either lower costs — not happening, right — or they need higher sales. And the more those interest rates keep going up, the more those sales are going to drop and the higher the costs are for consumers, the more difficult it is for them to compete, particularly against larger competitors. So that's the dilemma."
Hurst also suggested that there could be a bit of a silver lining to the Fed's forecast of higher unemployment.
"I guess there is an argument that maybe that would be a good thing. I mean, at least a measured increase in unemployment and maybe that would bring some folks back into the workforce and help a lot of the particularly small businesses to better serve their customers and get more people in downtown Boston and so forth," he said. "So it's really strange how low the unemployment is yet how at risk the economy is."
Work and Style
Collins, whose most recent job was as provost and executive vice president for academic affairs at the University of Michigan, was hired as president and CEO of the Boston Fed in February and started the job in July. She has ties to the Boston area, having earned her undergraduate degree at Harvard University and her Ph.D. at the Massachusetts Institute of Technology. Her career has also included stints as senior staff economist at the President's Council of Economic Advisers, professor at Georgetown University, senior fellow in economic studies at the Brookings Institution, visiting scholar at the International Monetary Fund, and teaching economics at Harvard.
Collins said she was born in Scotland to Jamaican parents and grew up in New York City. She is the first Black woman to lead one of the Federal Reserve's regional banks. Collins' term as president will run until Feb. 28, 2026, the Fed said, when she and every other Reserve Bank president will be evaluated for reappointment.
Eric Rosengren, the Boston Fed's previous president, retired last September after 14 years leading the regional branch of the central bank.
Collins' hand in national monetary policy comes as a product of her participation on the Federal Open Market Committee, the Fed's policymaking body. But as head of the Boston Fed, she also leads a regional organization that has a long history of research and public policy participation.
On Monday, she highlighted some of the ongoing work of the Boston Fed and singled out the work being done around FedNow, a new, real-time payment system that Collins said will "change the future of payments" when it is released in mid-2023.
"The FedNow service will provide a new clearing and settlement infrastructure, enabling participating financial institutions to provide instant payment services in real-time — 24/7/365," she said. "For businesses, it will mean the ability to make just-in-time payments toworkers or suppliers, or receive an immediate payment at the time of sale. For individuals, instant payments can be used to facilitate time-sensitive bill payments or reduce high-cost bridge borrowing."
She also pointed out the Fed's work on its "Working Places" initiatives, in which the Fed convenes and connects state government, the private sector, philanthropists, local organizations and residents to work together on local issues. She said that kind of work is a representation of the leadership style she hopes to bring to the Boston Fed.
"The goal is to support a vibrant economy and a financial system that all can depend on. The challenges in our region, some of which I've mentioned, clearly do require cross-sector collaboration and that's something that I'm actually quite passionate about because that's the way we get things done and that's the way that we enhance the work and build on the work that we're already doing," Collins said.